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Untitled Document
2003-TIOL-04-HC-DEL-IT
IN THE HIGH COURT OF DELHI
C.W.P. NO. 5646 OF 2000 with
C.W.P. NO. 2802 OF 2002
SHRI SHIVA KANT JHA
Vs
UNION OF INIDA & ORS
AZADI BACHO ANDOLAN
Vs
UNION OF INDIA & ANR
S.B. SINHA, C J & A.K. SIKRI, J
Dated : May 31, 2002
Statutory power of the AO cannot be taken away by the CBDT; Circular
789 stands quashed - Govt advised to look into whether it should allow the
opaque system to operate particularly in the light of the fact that it is causing
a loss of crores of rupees to the exchequer
JUDGEMENT
Per Sinha, C.J :
Purported flaws in the avoidance of double taxation treaty
with Mauritius is the subject matter of these two public interest litigations.
The petitioner in Civil Writ Petition No. 2802 of 2000 is said to be a voluntary
organization working for various social causes such as removal of corruption,
campaigning against the threat of the sovereignty of the country from multi-national
companies and multi-lateral funding agencies such as IMF, World Bank, etc.
The petitioner in Civil Writ Petition No. 5646 of 2000 is a former member of
Indian Revenue Services having retired as Chief Commissioner of Income-tax
in March 1998.
In both these writ petitions, the validity of a circular issued
by the Central Board of Direct Taxes ( in short, the ‘CBDT’) bearing
No. 789 of 13.04.2000 is in question.
FACTS : -
Several hundred Foreign Institution Investors ( in short “FIIs)
had been trading in the share market in India many of which are said to be
post box companies based in Mauritius; although in effect and substance, they
are managed and controlled from India or from their parent countries.
The Indian Income-tax Act, 1961 (hereinafter referred to as, “the
Act”) although postulates that all assesses, whether resident in India
or not, are chargeable to income-tax in respect of income accrued, arisen or
received; or deemed to accrue, arise or to be received in India, while residents
alone are chargeable in respect of income, which accrues or arises or to be
received in India or abroad.
The scheme of the Act, however, is that if the FIIs are effectively
managed and controlled from India, they are treated as residents of India,
while if they are managed and controlled out of India, they are treated as
non-residents.
With a view to avoid double taxation of income, the Central
Government is empowered to enter into agreement(s) in terms of Section 90 of
the Act; pursuant whereto the government of Republic of India and the Government
of Mauritius entered into a Double Taxation Avoidance Convention (hereinafter
referred to as ‘the Convention ) for avoidance of double taxation and
the prevention of fiscal evasion with respect of taxes on income and capital
gains.
Having regard to the globalisation of economic policy adopted
by India relaxation on regulations and controls on direct foreign investment
took place in 1992 wherefor guidelines have been announced. The said Convention,
as would appear from its preamble, was entered into “ for the encouragement
of mutual trade and investment in India and Mauritius”.
Allegedly Mauritius became a tax haven, as a result whereof,
the treaty shoppers from Luxemburg and other western countries commenced the
process of using Mauritius route for investment in India solely to avoid incidence
of lawful tax. Allegedly conduit companies were set up in Mauritius through
which they made investment in India share market purported to be for taking
benefit under para 4 of Article 13 of the Convention.
It is alleged that as in Mauritius, no capital gains tax is
payable and thus the question of avoidance of payment of double tax in relation
thereto does not arise. Taking benefit of the scheme, however, devices were
adopted to avoid payment of tax in utter violation of the spirit of the said
Convention as a result whereof wrongful gain accrued by the said non-resident
Indian companies and caused wrongful gain accrued by the said non-resident
Indian companies and caused wrongful loss to the country.
Allegedly in relation to one company, the Income Tax Officer
( in short, ‘the ITO) showing how sharp practices are adopted for taking
benefit of the said Scheme made a detailed study and passed a detailed order
of assessment whereafter the impugned circular letter was issued, which is
in the following term:-
Circular No.
789/Dated: April 13, 2000
Subject : Clarification regarding taxation of income from
dividends and capital gains under the Indo-Mauritius Double Taxation Avoidance
Convention (DTAC)
The provisions of the Indo-Mauritius DTAC of 1983 apply to residents of both
India and Mauritius, Article 4 of the DTAC defines a resident of one State of
mean “any person who, under the laws of that State is liable to taxation
therein by reason of his domicile, residence, place of management of any other
criterion of a similar nature.” Foreign Institutional Investors and other
investment funds etc., which are operating from Mauritius are invariably incorporated
in that country. These entitles are ‘liable to tax’ under the Mauritius
Tax law and are, therefore, to be considered as residents of Mauritius in accordance
with the DTAC.
2. Prior to 1.6.1997, dividends distributed by domestic companies where taxable
in the hands of the shareholder and tax was deductible at source under the Income
Tax Act, 1961. Under the DTAC, tax was deductible at source on the gross dividend
paid out at the rate of 5% or 15 % depending upon the extent of shareholding
of the Mauritius resident. Under the Income Tax Act 1961, tax was deductible
at source at the rates specified under the Section 115 A etc., Doubts have been
raised regarding the taxation of dividends in the hands of investors from Mauritius.
It is hereby clarified that wherever a Certificate of Residence is issued by
the sufficient evidence for accepting the status of residence as well as beneficial
ownership for applying he DTAC accordingly.
3. The test of residence mentioned above would also apply in respect of income
from capital gains on sale of shares. Accordingly, FIIs etc. which are resident
in Mauritius would not be taxable in India on income from capital gains arising
in India on sale of shares as per paragraph 4 of Article 13.”
4. The aforesaid clarification shall apply to all proceedings
which are pending at various levels.
5. The contents of this Circular may be brought to the notice of all the Commissioners
of Income tax and Assessing Officers in your region.
F. No. 500/60/2000- FTD
(Rajat Bansal)
OSD (FTD), Central Board of Direct Taxes
SUBMISSIONS : -
Mr. Prasant Bhushan and Mr. S.K Jha appearing on behalf of the petitioners inter
alia submitted that the aforementioned circular has been issued in violation
of the Convention itself, which in turn was issued in terms of Section 90 of
the Act and not in terms of Article 73 of the Constitution of India ( in short,
“ the Constitution”)
It was contended that mere issuance of a certificate is not determinative and
encourages treaty shopping in a case where the company has no base in Mauritius,
the non –resident company should not be allowed to take benefit thereof
as thereby a fraud would be encouraged.
It is urged that the said circular is illegal and contrary to the provisions
of the Statute and must be held to be wholly applicable where sub-section (3)
of Section 4 is attracted.
In any event, the same is ultra vires Section 119 of the Act in terms whereof
the Central Board of Direct Taxes (in short ‘the CBDT) could not have issued
the impugned circular. The burden of proof, having regard to the applicability
of the Act, is upon the assessee to show that the exemptions are being claimed
within the meaning of Section 10 of the Act and same are within the purview of
the Treaty itself.
It was contended that by reasons of the aforementioned circular the CBDT effectively
asked the ITO to ignore the provisions of the income tax Act. In a case, the
learned counsel would contend even if ITO on the basis of the material on the
record come to the conclusion that a particular company was in fact is not a
resident of Mauritius, he has to accept him as such only on the ground that he
has obtained a certificate from the authorities in this behalf. Observance of
the provisions of Indo-Mauritius Treaty, it was submitted, is subject to the
provisions of Indian Income-tax Act and thus it may not be possible to take any
certificate on its face value as the authorities in exercise of statutory powers
may be convinced that from the facts of the matter and other circumstances attending
thereto certificate of residence does not fulfill the requirements of the Indian
Income-tax Act. In any event, in a given case, a company may be found to be resident
of India apart from being a resident of Mauritius and thus it would be contrary
to clause 4(3) of the treaty itself. Place of business of the company, learned
counsel would urge, would be the determining factor of the residence in terms
Article 4. By reason of the said circular even the power of the ITOs to lift
the corporate veil has been taken away. Reliance in this connection has been
placed on New Horizons Ltd and Anr. Vs. UOI and Ors. 1995(1) SCC 478 and LIC
v. Escorts, AIR 1986 SC 1370. Learned counsel would contend that as has been
found in the assessment order that the company got itself registered for avoiding
tax and in the event it is held that by reason of such a circular ITO ever is
precluded from going into such a question. The same would be violative of the
decisions of the supreme Court , e.g. McDowell
& Co. Ltd. v. Commercial Tax Officer 1985 (154) ITR 148 = (2002-TIOL-40-SC-CT).
It was contended that having regard to the effect that there is no capital
gain in Mauritius the question of avoidance of double taxation would not arise
at all.
The learned Solicitor General appearing on behalf of the respondents, on the
other hands, submitted that by reason of the impugned circular, no embargo has
been placed on the I.T.O to go into the question if any dispute arises as to
whether the assessee is a resident of Mauritius or not. In the event, it is found
that the effective place of management of the company is in India, the benefit
of the said circular may not be given. It is further contended that capital gains
tax is also chargeable in Mauritius, and the same has nothing to do with avoidance
of double taxation.
The CBDT having regard to the requisite jurisdiction to issue the circular, the
same cannot be said to be wholly without jurisdiction warranting interference
of this Court in exercise of its powers under Article 226 of the Constitution
of India.
Learned Solicitor General would contend that necessity to issue such a circular
arose having regard to the fact that it was found that in a number of cases although
admittedly some companies were incorporated in Mauritius probe is being made
by the assessing officers without any rhyme or reason. Such an enquiry, learned
counsel would contend is contrary to letter and spirit of the treaty between
the two countries and created unpleasantness. It was contended that some clarification
had been issued as regards legal position that were a company incorporated was
in Mauritius it was to be treated as a resident of Mauritius. However, in a case
where the company is also a resident of India by applying the test of place of
business domiciles etc it was open to the ITO to make necessary enquires. In
other words, the Solicitor General would contend that the said circulars would
not apply to a case were Article 4 would be applicable. Counsel would urge that
section 90 of the Income-tax Act contemplates various kinds of treaties, including
the treaty in respect of avoidance of double taxation including income-tax which
is a tax in both the countries. He would urge that different heads of income
are not relevant for the purpose of enforcing the treaty inasmuch as in one country
income from one head may be exempted, whereas in another the income from another
head may be so exempted but hat t does not mean that income-tax is not payable
at all. Submissions have also been made to the effect that legality of such a
treaty is beyond the pale of judicial review as the said power is a sovereign
function. The reason for entering into such a treaty may be for various reasons
including political and economical and thus this court in exercise of its jurisdiction
under Article 226 cannot interfere therewith.
RELEVANT PROVISIONS OF THE STATUTE :-
Section 2 (17) of the Act defines a ‘company’ to
mean not only an Indian Company, but also a body corporate incorporated by
or under the laws of a country outside India.
Section 5(2) of the Act defines ‘scope of total income’ and
reads thus : -
“Section 5 : Scope of total Income
(2) Subject to the provisions of this Act, the total income
of any previous year of a person who is a non-resident includes all income
from whatever source derived which :
(a) is received or is deemed to be received in India in such
year by or on behalf of such person: or
(b) accrues or arises or is deemed to accrue or arise to him in India during
such year.
Explanation 1 : Income accruing or arising
outside India shall not be deemed to be received in India within the meaning
of this section by reason only of the fact that it is taken into account in
a balance-sheet prepared in India.
Explanation 2 : For the removal of doubts,
it is hereby declared that income which has been included in the total income
of a person on the basis that it has accrued or arisen or is deemed to have
accrued or arisen to him shall not again be so included on the basis that it
is received or deemed to be received by him in India.”
In terms of the aforementioned provisions, even capital gain
would be taxable.
Section 6 of the Act specifies as who is a ‘resident’ of
India for the purpose of the said Act. Sub-section (3) of Section 6 of the
Act stipulates that a ‘company’
said to be a ‘resident’ in India in any previous year, in every
year, in every case except if inter alia, during that year, the control and
management of its affairs is situated wholly outside India.
Section 10 of the Act provides of the ‘incomes’ which do not form
of total income. Section 90 of the Act, which is relevant for the purpose of
this case, reads thus : -
“Section 90. Agreement with foreign countries
(1) The Central Government may enter into an agreement with the Government of
any country outside India -
(a) for the granting of relief in respect of income on which
have been paid both income-tax in that country, or
(b) for the avoidance of double taxation of income under this
Act and under the corresponding law in force in that country, or
(c) for exchange of information for the prevention of evasion
or avoidance of income-tax chargeable under this Act or under the corresponding
law in force in that country, or investigation of cases of such evasion or
avoidance, or
(d) for recovery of income-tax under this Act and under the
corresponding law in force in that country, and may, by notification in the
Official Gazette, make such provisions as may be necessary for implementing
the agreement.
(2) Where the Central Government has entered into an agreement
with the Government of any country outside India under sub-section (1) for
granting relief of tax, or, as the case may be , avoidance of double taxation,
then in relation to the assessee to whom such agreement applies, the provisions
of this Act shall apply to the extent they are more beneficial to that assessee.
Explanation : - For the removal of doubts,
it is hereby declared that the charge of tax in respect of a foreign company
at a rate higher than the rate at which a domestic company is chargeable, shall
not be regarded as less favorable charge or levy of tax in respect of such
foreign company has not made the prescribed arrangement for declaration and
payment within India, of the dividends (including dividends on preference shares)
payable out of its income in India.
Section 119 of the Act makes a provision for ‘instructions
to subordinate authorities’
as under : -
Section 119. Instructions to subordinate authorities
(1) The Board may, from time to time issue such orders, instructions
and directions to other income –tax authorities as it may deem fit for
the proper administration of this Act, and such authorities and all other persons
employed in the execution of this Act shall observe and follow such orders,
instructions and directions of the Board :
Provided that no such orders, instructions or directions shall be issued –
(a) so as require any income-tax authority to make a particular
assessment or to dispose of a particular case in a particular manner; or
(b) so as to interfere with the discretion of the Commissioner
(Appeal) in the exercise of his appellate functions.
(2) without prejudice to the generality of the foregoing power,-
(a) the Board may, if it considers it necessary or expedient
so to do, for the purpose of proper and efficient management of the work of
assessment and collection of revenue, issue, from time to time (whether by
way of relaxation of any of the provisions of sections 139, 143, 144, 147,
148,154, 155, [ sub section (1A) of section 201, section 210, 211, 234A, 234
B, 234 C,] 271 and 273 or otherwise) general or special orders in respect of
nay class of incomes or class of cases, setting forth direction or instructions
(not being prejudicial to assesses) as to the guidelines, principles or procedures
to be followed by other income tax authorities in the work relating to assessment
or collection of revenue or the initiation of proceedings for the imposition
of penalties and any such order may, if the Board is of opinion that it is
necessary in the public interest so to do, be published and circulated in the
prescribed manner for general information;
(b) the Board may, if it considers it desirable or expedient
so to do for avoiding genuine hardship in any case or class of cases, by general
or special order, authorize any income-tax authority, not being a Commissioner
(Appeals) to admit an application or claim for any exemption, deduction, refund
or any other relief under this Act after the expiry of the period specified
by or under this Act for making such application or claim and deal with the
same on merits in accordance with law.
(c) the Board may, if it considers it desirable or expedient
so to do for avoiding genuine hardship in any case or class or cases, by general
or special order for reasons to be specified therein relax any requirement
contained in nay of the provisions of Chapter IV or Chapter VI- A, where the
assessee has failed to comply with any requirement specified in such provision
for claiming deduction thereunder, subject to the following conditions, namely
:-
(i) the default in complying with such requirement was due
to circumstances beyond the control of the assessee; and
(ii) the assessee has complied with such requirement before
the completion of assessment in relation to the previous year in which such
deduction is claimed:
Provided that the Central Government shall caused every order
issued under this clause to be laid before each House of parliament .
The impugned Circular dated 13.4.2000 is in the following
terms :
“The provisions of the Indo-Mauritius DTAC if 1983 apply
to residents of both India and Mauritius Article 4 of the DTAC defines a resident
of one State to mean
“any person who, under the laws of that State is liable to taxation therein
by reason of his domicile, residence, place of management or any other criterion
of a similar nature” foreign Institutional investors and other investment
funds etc which are operating from Mauritius are invariably incorporated in
that country. These entities are liable to tax under the Mauritius Tax law
and are therefore to he considered as residents of Mauritius in accordance
with the DTAC.
2. prior to 1.6.1997, dividends distributed by domestic companies
were taxable in the hands of the shareholder and tax was deductible at source
under the Income-tax Act, 1961. Under the DTAC tax was deductible at source
on the gross dividend paid out at the rate of 5% or 15% depending upon the
extent of shareholding of the Mauritius resident. Under the Income-tax Act,
1961 tax was deductible at source at the rates specified under Section 115A
etc. Doubts have been raised regarding the taxation of dividends in the hands
of investors from Mauritius. It is hereby clarified that wherever a certificate
of residence is issued by the Mauritius Authorities, such certificate will
constitute sufficient evidence for accepting the status of residence as well
as beneficial ownership for applying in the DTAC accordingly.
3. The test of residence mentioned above would also apply
in respect of income from capital gains resident in Mauritius would not be
taxable in India on income from capital gains arising in India on sale of shares
as per paragraph 4 of Article 13”
(emphasis supplied)
The treaty dated 6.12.1983 was issued under notification NO
GSR 920 (E) dated 6.12.1983. The convention was entered into between India
and the Govt. of Mauritius for avoidance of double taxation and prevention
of fiscal evasion with respect to taxes on income and capital gains and for
encouragement of mutual trade and investment with Mauritius.
Article 3 of the said Treaty contains interpretation clause.
Article 3 ( 1) (d) defines the term “tax” to mean means Indian
tax or Mauritius tax as the context requires, but shall not include any amount
which is payable in respect of any default or omission in relation to the taxes
to which this convention applies or which represents a penalty imposed relating
to those taxes;
Article 4(3) defines a ‘person’ thus “Where
by reason of the provision of paragraph (1) a person other than an individual
is a resident of both the Contracting State, then it shall be deemed to be
a resident of the Contracting State in which tits place of effective management
is situated”
The term competent authority is defined by Article 2(h) to
mean “in the case of India, the Central Government in the Ministry of
Finance (Deptt. of Revenue) or their authorized representative and in the case
of Mauritius the Commissioner of Income-tax or his authorized representative.
Article 13 deals with capital gains. It reads
thus:
“(1) Gains from the alienation of immovable property, as defined in paragraph
(2) of Article 6, may be taxed in the Contracting State in which such property
is situated.
(2) Gains from the alienation of movable property pertaining
to a fixed bases available to a resident state for the purpose of performing
independent personal service including gains from the alienation of such a
permanent establishment (alone or together with the whole enterprise) or of
such a fixed base, may be taxed in that other State.
FINDINGS
One of the questions which would arise for consideration is as to whether the
impugned circular is within the parameter of Section 119 of the Income-tax Act.
CBDT may issue circular which may or may not be binding on the authorities. Recently
in CIT Mumbai v. Anjum MH Ghaswala & Ors 2001 (9) JT (SC) 61 the law is stated
thus :
“32…. It is true that by this press release the board had interpreted
the provisions of the Act in a particular manner. Be that as it may, we would
like to make it clear that every clarificatory note or press release issued by
the board does not have the statutory force like the circulars issued by the
board under section 119 of the Act will have the statutory force and will be
binding on every income-tax authorities. Therefore, the press release relied
upon by Shri Ramamuriti not being a circular issued under Section 119 of the
Act will not be of any assistance to the respondents in support of their contentions.
Prima facie by reason of the said circular no direction has
been issued. A clarification has been sought to be made as regards taxation
from dividends and capital gains in Indo Mauritius Double Taxation Convention.
The Circular itself does not show that the same has been issued under Section
119 of the Income-tax Act, the same would be legally binding on the revenue.
The circular does not deal with power of the ITO to consider the question as
to whether although apparently a company is incorporated in Mauritius but whether
the company is also a resident of India and/or not a resident of Mauritius
at all. If the said circular is considered to e issued by the CBDT in terms
of Section 119 of the Act, it is trite that the Central Govt. by reason of
affidavit or otherwise neither can supplement the reasons contained therein
nor explain the same. We may however, notice that the Central Govt. in its
affidavit states:
The determination of the country of residence of a tax-payer
is necessary for the purposes of the Double Taxation Avoidance Convention as
it applies to persons who are residents of one or both the States. Further,
as per the DTAC in relation to certain items or income, the country of source
of the income completely forgoes the right to levy tax (e.g. Article 8 and
para 4 of Article 13). In respect of other items of income, the country of
residence of the tax payer waives the primary right to levy tax and gives a
credit for the tax paid in the source country (e.g. Article 10, 11 and 12)
It is for the Assessing officer, on the facts of every case
to determine whether the assessee is a resident of India or Mauritius. For
determining the residence in India, the powers of the Assessing officer are
untrammeled since it would principally be for him to determine whether an assessee
is resident in India. When an assessee claims to be resident of Mauritius the
certificate to this effect issued by the authorities of that government would
be conclusive. However, this conclusiveness would be in relation to its residence
in Mauritius.
Where, however, an assessee, who is a resident of Mauritius,
is also found to be resident of India in accordance with the paragraph 1 of
Article 4 the provisions of para 3 of the DTAC have to be applied”.
From the said circular, three situations arise: a) the assessee
is a resident of Mauritius; b) a tie-breaker clause may apply an assessee may
be a resident of Mauritius and India; c) an assessee is a company incorporated
in Mauritius although it is in effect and substance a resident of a third country.
In terms of the affidavit the ITO would determine whether
the assessee is a resident of India but only because the assessee claims himself
to be a resident of Mauritius, a certificate issued by the authorities of the
Mauritius would be conclusive. The circular does not say so. It is now well
settled that when a statutory authority exercise its jurisdiction under the
provisions of statute such an order has to be counter affidavit . Furthermore,
the effect and purport of a statutory order cannot be enlarged nor diluted
by way of an affidavit otherwise.
The power of the CBDT to issue instructions to subordinate
authorities is limited. Such an instructions can be issued only for proper
administration f the provisions of the Income-tax Act and not otherwise. It
cannot issue any instruction which would be de’hors the provisions of
the said Act. By reason of the impugned circular for all intent and purport,
the CBDT had directed the income tax authorities to accept the circular of
residence issued by the authorities of Mauritius as sufficient evidence as
regards its status of residence and ownership of the companies. The said circular,
purports to direct all the authorities to accept the certificate of residence
without further questioning the correctness or legality thereof whenever a
benefit is claimed under double taxation treaty. It further directs that the
individuals and companies would not be taxed as capital gains in India if the
companies are declared to be resident of Mauritius in terms of such certificate.
For the purpose of disposal of these writ petitions, it is also necessary to
look to the provisions of Indian Income-tax Act. Section 5 of the Act provides
that total income of the residents would include all income from whatever source
whether in India or outside. Under sub-section (2) of section 5 provides that
so far a non-resident is concerned its total income would be the sum which is
received by him in India which arise or is deemed to accrue to him in India in
a relevant year. Sub section (3) of Section 6 provides that a company is said
to be a resident in India in any previous year, if 10 it is an Indian company
or ii) during that year except in a case where the control and management of
its affairs is situated wholly outside India. Section 9 of the Income-tax Act
reads this :
9(1) the following incomes shall be deemed to accrue or arise in India (i) all
income accruing or arising whether directly or indirectly through or from any
business connection in India or through or from any property in India, or through
or from any asset or source of income in India or through the transfer of a capital
asset situate in India.
The function an ITO is quasi judicial in nature. It for the
purpose of finding out as to whether an assessee can take shelter under double
taxation avoidance treaty or not is entitled to make such enquiries which are
permissible in law. For the said purpose it not only is entitled to lift the
corporate veil but also is entitled to find out not only to whether company
is actually a resident of Mauritius or not and/or whether it is paying income-tax
in Mauritius or not or in fact the company is not a resident of Mauritius at
all. In revenue an taxation matters the courts have very often lifted the corporate
veil. Even a corporate entity is disregarded when it was used fro tax evasion
or to circumvent tax obligation or to perpetuate fraud. It is also lifted for
determining whether a transaction is sham or illusory or a device or ruse.
Income tax authorities are entitled to penetrate the veil covering it and ascertain
the truth and ascertain reality behind the legal façade., Assessing
authority can go into the genuineness or validity of a document or to see as
to whether a transaction is collusive or fraudulent.
Conclusiveness of a certificate of residence granted by the
Mauritius tax authorities is not contemplated under the treaty or under the
income-tax Act. Whether a statement shall be conclusive or not must be provided
for under a legislative act e.g. Indian Evidence Act. When evidence in relation
to a matter under issue is produced before the authorities exercising judicial
function by reason of a circular issued by CBDT it cannot be prescribed that
such evidence shall be conclusive. Such a provision as regards conclusiveness
of a certificate must find place in the statute itself, as for example we may
notice that such a certificate or citizenship having regard to the provisions
of Section 9(2) of the Citizenship Act read with Rule 30 of the Citizenship
rules speaks of such a contingency.
An abuse of the treaty or treaty shopping is illegal and thus necessarily forbidden.
The said Convention was entered into, as noticed hereinbefore,
between the Government of Republic of India and the Government of Mauritius
for avoidance of double taxation and the prevention of fiscal evasion with
regard to tax on income and capital gains and for encouragement of mutual trade
and investment. In terms of Article 28 thereof notification bearing No. GSR
920 (E) dated 6th December, 1983 was issued.
Power of issuance of a circular in terms of Section 119 of
the Income tax Act has been delegated to the Central Board of Direct Taxes
for a limited purpose. By reason of such a circular neither the essential legislative
function, can be delegated nor arbitrary thereby uncanalised or naked power
can be conferred. Delegated authority, it is trite must act within four corners
of delegated legislation. It is not only to act having regard to the purpose
and object for which the power has been delegated, it must act having regard
to the provisions of the statute as also the delegated legislation.
It is now trite that by reason of any power conferred upon
any statutory authority to issue any circular, the jurisdiction of a quasi
judicial authority in relation thereto cannot be taken away. In Orient Paper
Mills Ltd. v. Union of India AIR 1969 SC 48, it has been held as follows :
7. This leaves us with the question of the directions issued
by the Board. The question whether “M.G. Poster Paper” is “printing
and writing paper” or “packing and wrapping paper” is essentially
a question of fact. That had to be decided by the authorities under the Act.
It was not denied before us that the Collector and the Central Government while
deciding the appeals and the revision applications respectively functioned
as quasi judicial authorities. So far as the nature of power exercised by the
Central Government under S. 36 of the Act (revisional powers) is concerned,
the matter is concluded by the decision of this Court in Aluminium Corporation
of India Ltd. v. Union of India, Civil Appeal No. 635 of 1964 , D/ 22-9-1965
(SC). Therein this Court held that the said power is a quasi judicial power.
There is hardly any doubt that the power exercised by the appellate authority,
i.e., the Collector, under Section 35 is also a quasi judicial power. He is
designated as an appellate authority; before him there was a lis between the
appellant which had paid the duty and the Revenue; and his order is subject
to revision y the Central Government. Therefore, it is obvious that the power
exercised by him is a quasi judicial power. Dr. Syed Mohammed, appearing for
the respondent, did not contend - and we think rightly – that the power
exercised by the Collector was not a quasi judicial power.”
In Sirpur Paper Mills Ltd. v. The Commissioner of Wealth Tax
Hyderbad 1970 (1) SCC 795, the apex court held :-
4 Section 25 of the Wealth Tax Act Provides in so far as it
is material:
(1) The Commissioner may, either of his own motion or on application
made by an assessee in this behalf, call for the record of any proceeding under
this Act in which an order has been passed by any authority subordinate to
him and may make such inquiry, or cause such inquiry to be made, and subject
to the provisions of this Act, pass such order thereon, not being order prejudicial
to the assessee, as the Commissioner thinks fit.”
The Power conferred by Section 25 is not administrative: it
is quasi-judicial. The expression “may make such inquiry and pass such
order thereon” does not confer any absolute discretion on the Commissioner.
In exercise of the power the Commissioner must bring to bear an unbiased mind,
consider impartially the objections raised by the aggrieved party, and decide
the dispute according to procedure consistent with the principles of natural
justice: he cannot permit his judgment to be influenced by matters not disclosed
to the assessee, nor by dictation of another authority. Section 13 of the Wealth
Tax Act provides that all officers and other persons employed in the execution
of this Act shall observe and follow the orders, instructions and directions
of the Board. These instructions may control the exercise of the power of the
officers of the Department in matters administrative but not quasi-judicial.
The proviso to Section 13 is somewhat obscure in its import. It enacts that
no orders, instructions or directions shall be given by the Board so as to
interfere with the discretion of Appellate Assistant Commissioner or Wealth
Tax in the exercise of his appellate functions. It does not, however, imply
that the Board may give any directions or instructions to the Wealth –tax
Officer or to the Commissioner in exercise of his quasi-judicial function.
Such an interpretation would be plainly contrary to the scheme of the Act and
the nature of the power conferred upon the authorities invested with quasi-judicial
power.”
In Orient Paper Mills Ltd. vs. Union of India 1970 (3) SCC
76 the Apex Court observed as follows :
4. Now it is common ground, it being admitted in the statement
of case filed on behalf of the respondent that the paper was assessed to duty
in accordance with the instructions from the Collector. The main question is
whether an assessment made by a subordinate officer in accordance with the
instructions issued by the Collector to whom an appeal lay against the order
of the subordinate officer can be called a valid assessment in the eye of law.
As has been pointed out in Orient Paper Mills Ltd. v. Union of India (1969)
1 SCR 245 : AIR 1969 SC 45, in which the parties were the same as before us
now on authority, however high, can control the decision of a judicial or a
quasi-judicial authority that being the essence of our judicial system. In
the present case, when the assessment is to be made by the Deputy Superintendent
or the Assistant Collector , the Collector to whom an appeal lies against his
order assessment, cannot control or fetter his judgment in the matter of assessment.
If the Collector issues directions by which the deputy Superintendent or the
Assistant Collector is bound, no room is left for the exercise of his own independent
judgment.
5. According to the learned Attorney-General the assessment
proceedings are not of a quasi-judicial nature nor is the assessing authority
a quasi-judicial authority. We are unable to agree. It is apparent from the
judgment referred to above and numerous other decisions of this Court delivered
in respect of various taxation laws that the assessing authorities exercise
quasi-judicial functions and they have duty case on them to act in a judicial
and independent manner. If their judgment is controlled by the directions given
by the Collector it cannot be said to be their independent judgment in any
sense of the word. An appeal then to the Collector becomes an empty formality.
In the previous decision of this Court mentioned above the appeal and the revision
have been rejected by the Collector and the Central government on the ground
that a direction had been issued by the Central Board of Revenue to the effect
that the paper in question be treated as belonging to a particular classification.
This Court entertained no doubt that the direction given by the Board was invalid
and it vitiated the proceedings before the Collector as well as the Government
. Similarly in the present appeal the direction given by the Collector was
invalid and the proceedings before the Deputy Superintendent or the Assistant
Collector were vitiated. This position obtains in all the appeals although
the type and quality of paper are different. The Central Government merely
affirmed the order made by the Collector in each case and id not give and any
independent reasons for upholding the levy of duty made in accordance with
the directions of the Collector.
It is contended by the learned Solicitor General that by reason
of the said treaty a political arrangement has been made. The same, in our
opinion, would run counter to the provisions of Section 90 of the Indian Income-tax
Act. Political expediency cannot be ground for fulfilling the constitutional
obligation.
In S.R. Chaudhary v. State of Punjab and Others, 2001 (7) SCC 126 the Apex Court
while interpreting the provisions of Article 164 of the Constitution of India,
stated the law thus :
“33 Constitutional provisions are required to be understood
and interpreted with an object oriented approach. A constitution must not be
construed in a narrow and pedantic sense. The words used may be general in
terms but, their full import and true meaning, has to be appreciated considering
the true context in which the same are used and the purpose which they seek
to achieve. Debates in the constituent Assembly referred to in an earlier art
of this judgment clearly indicate that a non-member’s inclusion in the
Cabinet was considered to be a “privilege” that extends only for
six months during which period thee member must get elected, otherwise he would
cease top be a Minister. It is settled position that debates in the Constituent
Assembly may be relied upon as an aid to interpret a constitutional provision
because it is the function of the court to find out the intention of the framers
of the Constitution. We must remember that a constitution is not just a document
in solemn form, but a living framework for the government of the people exhibiting
a sufficient degree of cohesion and its successfully working depends upon the
democratic spirit underlying it being respected in letter and in spirit. The
debates clearly indicate the “privilege” to extend “only” for
six months.”
It was held :
40. Chief Ministers or the governors, as the case may be,
must for ever remain conscious of their constitutional obligations and not
sacrifice either political responsibility or parliamentary conventions at the
alter of political expediency. Prof B.O. Nwabueze in his book Constitutionalism
in the Emergent States (1973 Edn. P. 139) almost thirty years ago warned :
“Experience has amply demonstrate that the greatest
danger to constitutional government in emergency States arises from the human
factor in politics, from the capacity of politicians to distort and vitiate
whatever government forms may be devised., Institutional forms are of course
important, since they can guide for better or for worse the behavior or the
individuals who operate them yet, however, carefully the institutional forms
may have been constructed, in the final analysis much more will turn upon the
actual behavior of these individuals upon their willingness to observe the
rules, upon a statesmanlike acceptance that the integrity of the whole governmental
framework and the regularity of its procedures should transcend any personal
aggrandizement. The successful working of any Constitution depends upon what
has aptly been called the democratic spirit that is, a spirit of fair play,
of self-restraint and of mutual accommodation of differing interests and opinions.
There can be no constitutional government unless the wielders of power are
prepared to observe the limits upon governmental powers.,”
41. Prof. Nwabueze’s warning has great relevance today
in the context under our consideration. For parliamentary democracy to evolve
and grow, certain principles and policies of public ethics must form its functioning
base. Actions such as in the present case pose grave danger to foundations
and principles of Constitutionalism and the same must be warded off by developing
right attitude towards constitutional provisions. Constitutional restraints
must not be ignored or bypassed if found inconvenient or bent to suit “political
expediency”. We should not allow erosion of principles of constitutionalism.”
Yet again in Kishan Praksah Sharma v. Union of India 2001(5)
SCC 212 ; RaJinder Babu, J. Speaking for the Constitutional Bench stated the
law thus :
So far as the delegated legislation is concerned, the case-law
will throw light as to the manner in which the same has to be understood and
in each given case we have to understand the scope of the provisions and no
uniform rule could be laid down. The legislatures in India have been held to
possess wide power of legislation subject however, to certain limitations such
as the legislature cannot delegate essential legislative functions which consists
in the determination or choosing of the legislative policy and of formally
enacting that policy into a binding rule of conduct. The legislature cannot
delegate uncanalised and uncontrolled power. The legislature must set the limits
of the power delegated by declaring the policy of the law and by laying down
standards for guidance of those on whom the power to execute the law is conferred.
Thus the delegation is valid only when the legislative policy and guidelines
to implement it are adequately laid down and the delegate is only empowered
to carry out the policy within the guidelines laid down by the legislature.
The legislature may, after laying down the legislative policy, confer discretion
on an administrative agency as to the execution of the policy and leave it
to the agency to work out the details within the framework of the policy. When
the Constitution entrusts the duty of law making to Parliament and the legislatures
of States, it impliedly prohibits them to throw away that responsibility on
the shoulders of some other authority. An are of compromise is struck that
Parliament cannot work in detail the various requirements of giving effect
to the enactment and therefore that are will be left to be filled in the delegated.
Thus, the question is whether any particular legislation suffers from excessive
delegation and in ascertaining the same, the scheme, the provisions of the
statute including its preamble, and the facts and circumstances in the background
of which the statute is enacted, the history of the legislation, the complexity
of the problems which a modern States has to face will have to be taken note
of and if on a liberal construction given to a statute, a legislative policy
and guidelines for its execution are brought out, the statue, even if skeletal,
will be upheld to be valid but this rule of liberal construction should not
be carried by the court to the extent of always trying to discover a dormant
or latent legislative policy to sustain an arbitrary power conferred on the
executive. These very tests were adopted in Ajoy Kumar Banerjee case ((1984)
3 SCC 127) also to examine whether there is excessive delegation in framing
schemes and reading he preamble, the scheme and the other provisions of the
enactment taking note of the general economic situation in the country, the
authorities concerned had frame appropriate schemes. Therefore, it is not open
to the petitioners to contend that there is excessive delegation in relation
to the enactment to frame schemes.”
By reason of the circular a power is conferred to lay down
a law which is not contemplated under the Act or for the purpose of political
expediency. The same cannot be ultra vires. What prompted the Govt. of India
and the Govt. of Mauritius in the said treaty is not known. Submission of the
Solicitor General that this treaty must have been entered into looking to the
large population of Indians in the said country and also for future support
of the said country might have been taken into consideration. Any other purpose
would not only be ultra vires the same would be contrary to the purpose circular
had been issued bonafide, the question which has to be posed and answered by
the court is as to whether the same is consonance with the provisions of Section
90 of the Income-tax Act or is in public interest. The validity of the impugned
circular must be judged having regard to the limitations contained in Section
90 of the Act and not otherwise. It would not be correct to contend that section
90 of the Income tax Act confers a very wide power in terms whereof conferment
of an unguided or unbridled power is not contemplated. The very purpose of
entering into such a treaty is avoidance of double taxation. The Power in terms
of Section 90 has to be considered having regard thereto . The expression double
taxation had definite and precise meaning. In Black Law Dictionary the concept
has been defined to mean : 'the imposition of comparable taxes in two or more
States on the same tax payer, for the same subject matter or identical goods.'
The bilateral treaty can be entered into by two independent
governments but bilateral treaties for political expediency and bilateral treaty
in terms of a statute stand on different footing. A treaty which is entered
into in terms of Article 73 of the Constitution of India the political expediency
may have a role to play but not when the same is done under a statutory provisions.
Powers, functions and duties of the adjudicating authority cannot be taken
away under a treaty for loss by a circular. By reason of an international treaty,
a Government, les than CBDT can be allowed to lay down a procedure or evidentiary
value of a document which would be dehors the provisions of Indian Income-tax
Act. A statutory authority, it is well known must act within the four corners
of the stature. It must follows the procedure laid down therein and all other
action are necessarily forbidden. In Ramchandra vs. Govind, AIR 1975 SC 915
it is stated :
25.A century ago in Taylor v. Taylor (1875) 1 CH. D 426 Jessel
M.R. adopted the rule that where a power is given to do a certain thing in
a certain way the thing must be done in that way or not at all and that other
methods of performance are necessarily forbidden. The rule has stood the test
of time. It was applied by the Privy Council in Nazir Ahmed v. Emperor, 63
Ind App 372……..
So far as submission of the learned Solicitor General to the
effect that Mauritius route may be taken recourse to for gaining benefit as
is done by the industrialist setting up industries in M.P or some other place
in the country where tax benefit are given re concerned, the same is stated
to be rejected. Economic activities in different states by grant of exemption
to the industries are done in terms of the provisions of the statures. Such
exemptions are g ranted in furtherance of the legislative policy so as not
only to put the local resources including human resources to optimum use but
also for development of the country. Such benefits and exemptions are granted
by way of payment of sales tax and electricity subsidy etc but the same principle
cannot be said to be applicable for the purpose of double taxation avoidance
scheme. In any event, taking undue advantage of a scheme only for the purpose
of avoidance of tax cannot but be deprecated. Treaty shopping which amounts
to abuse of the Indo Mauritius Bilateral treaty, may amount to fraudulent practice
and cannot be encouraged. Philip baker on Double Taxation Convention and International
Law, Comments:
General subject to provision provides that treaty benefits
in the State of source are granted only if the respective income is subject
to tax in the State of residence. This corresponds basically to the aim of
tax treaties, namely to avoid double taxation.”
There may not be any doubt that Section 90 talks of income
generally., However income in fiscal legislative practice has a specific meaning
and the avoidance of double taxation is a term of art.
Avoidance of double taxation would mean that a person has
to pay tax at least in one country. Avoidance of double taxation would not
mean that a person do not have to pay tax in any country whatsoever. In Mauritius
in terms of stature that a foreign company is not entitled to owe any property,
open any bank account, do any business. Several restrictions have been imposed
in that country as a result whereof no income may be generated in Mauritius
and no income-tax may be payable therein.
Does double taxation treaty envisage such a situation. In our opinion it is not.
Petitioner has annexed a copy of the order of the assessing
authority in the case of Cox and Kings. A bare perusal of the said order shows
that therein it was found that the company although had obtained residential
certificate in Mauritius but had nothing to do therewith and factually it got
itself registered only for the purpose of tax avoidance so as to obtain benefit
of the treaty.
Apex Court in McDowell & Col Ltd. v. CTO, (1985) 154 ITR
148 stated that the law laid down in Westminster was no longer a good law and
that the judicial attitude towards tax avoidance has changed. The Apex Court
stated :
“I have referred to the English cases at some length,
only to show that in the very country of its birth, the principle of Westminster
has been given a decent burial, and in that very county, where the phrase “tax
avoidance”
has originated, the judicial attitude towards tax avoidance has changed and
the smile, cynical of even affectionate through it might have been at one time,
has now frozen into a deep frown. The courts are now concerning themselves
not merely with the genuineness of a transaction, but with the intended effected
of it on fiscal purposes. No one can now get away with a tax avoidance project
with the mere statement that there is nothing illegal about it ……..
In our view, the proper way to construe a taxing statute, while considering
a device to avoid tax, is not to ask whether the provisions should be construed
literally or liberally, nr whether the transaction is not unreal and not prohibited
by the statute, but whether the transaction is such that the judicial process
may accord its approval to it.”
In Furniss (Inspector of Taxes ) v. Dawson and related appeals.
[1984] All ER 530 House of Lords stated thus:
“In determining the fiscal consequences of a preplanned
tax saving scheme no distinction was to be made between a series of steps which
were followed through by virtue of an arrangement which fell short of a binding
contract and a like series of steps which were followed through because the
participants were contractually bound to take each step. Accordingly, where
a tax avoidance or tax deferment scheme consisted of a commercial purpose other
than the avoidance or deferment of tax, liability to tax was to be determined
according to the substance of the scheme as a whole an its end result, notwithstanding
(a) that the arrangement was non-contractual or (b) that each particular step
has commercial effect or enduring legal consequences, or (c) that the arrangement
was not a self-cancelling scheme designed to produce neither a loss nor a gain.
Applying those principles since the intervention of G. Ltd. had no commercial
purpose other than deferment of the taxpayer’s tax liability, the transactions
concerning G. Ltd. were to be disregarded and the transaction treated simply
as the sale of the taxpayer’s share in X Ltd and Y Ltd. direct to the
purchaser. On that basis the tax payers were accordingly liable to capital
gains tax.”
Furthermore having regard to the decision of the Apex Court
in New Horizons Limited vs. UOI 1995 SCC 478, and Life Insurance Corporation
v. Escorts and Others AIR 1986 S.C 1370 there cannot be any doubt whatsoever
that in a given case the ITO is entitled to lift the corporate veil for the
purpose of finding out as to whether the purpose of the corporate veil is avoidance
of tax or not. Passing of an appropriate order of assessment is primary duty
of the assessing officer which would include conscious evasion of tax by an
assessee. Such a function which is judicial in nature can be regulated but
cannot altogether be prohibited. If on mere production of a purported residential
certificate by an authority (which again it would be a repletion to state is
not the subject matter of the treaty), the assessing authority has to put off
their hands. The same would render the circular ultra vires.
The suggestion to the effect that in such cases the attention
of the Central Govt. can be drawn and the matter can be taken up at the government
level is not contemplated in the statute. No law encourages opaque system to
prevail.
The core issue is as to what should be done when on investigation
it is found that the assessee is a resident of a third country having only
paper existence in Mauritius without any economic impact with a view to take
advantage of the double taxation avoidance scheme. No attempt has been made
to answer the question on behalf of the Central Govt. inasmuch as it merely
stated in the counter that power of the assessing authority under section 4(3)
of the treaty has not been taken away. By reason of the impugned circular even
such a power has been taken away inasmuch as a certificate of residence has
been made conclusive. In any event, having regard to the facts and circumstances
of the case, only by production of a residential certificate, an assessee cannot
be held to be entitled to take benefit of the treaty although it neither pays
income tax in India nor in Mauritius. Such an action would be ultra vires the
Income tax Act.
From the discussions made hereinbefore we are of the opinion
that the statutory power of the assessing authority cannot be taken away by
reason of the impugned circular. Be it recorded that counsel for the parties
have argued before us at great length and raised before us a large number of
questions which have been noticed hereinbefore to put keeping in view the fact
that only an interpretation of the statute vis-à-vis the impugned circular.
We are of the opinion that we need not go further and leave the other contentions
for being determined in an appropriate case.
We would however like to make an observation that the Central
Govt. will be well advised to consider the question raised by Shri Shiva Kant
Jha who has done a noble job in bringing into focus as to how the Govt. of
India had been losing crores and crores of rupees by allowing opaque system
to operate.
For the reasons aforementioned this writ petition is allowed
and the impugned circular is quashed. Consequently if the assessing authorities
intend to reopen any proceedings they would be entitle to take recourse to
such proceedings as are open to them in law. The petitioners are also entitled
to costs which is assessed at Rs. 10,000/-.
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